Saturday, June 22, 2013

Performance Update for Week of 6/17 - 6/21

The equity market would certainly like to forget about last week as S&P 500 declined more than 2%.  

With indications that the Fed may begin tapering in Q4, the 10-yr yield jumped 40bps from last week and ended the week nearly 50bps above where it was last month.  Such a reaction is due to worries that the Fed will begin to end its monetary easing policy.  Higher rates are not due to a much better economy, in our opinion.  Inflation remains very low, which basically shows that overall demand has not increased enough to push prices higher.  As we have said many times before, the improvement in corporate profitability that we have seen the last few years has been driven mostly by cost cutting measures, not by higher demand, which would have led to higher prices and more hiring.  Wage growth has remained stagnant.  

So, overall, the jump in rates was a reaction to what many think will be the removal of the stock market and the economy from their "life support system".  Of course, the higher rates impacted utilities, consumer staples and healthcare sectors a bit more.  But, in our opinion, once the overreaction fades away, and participants understand that higher rates were not driven by expectation of faster economic growth, we could see more money going into those defensive sectors.  As displayed in the last table, staples and healthcare have outperformed the overall market YTD and since March '12.  Simply put, what may be taking place is the realization that while QE has inflated asset prices,  it has not necessarily helped the economy.  And once a strategy is ineffective for a long period of time, the thought of abandoning it has to come to the forefront, which then leads to the equity market slowly trying to discount that ever-present QE premium.  

Regarding some economic numbers, we did not mention last week that the initial jobless claims were disappointing.  They came in at 354K, significantly above the 340K consensus and prior week's 336K (which was revised up from 334K).  The upcoming week will be a busy one as May durable orders, new home sales, and personal income growth will be reported.  In addition, the weekly initial jobless claims, along with Q1 GDP growth, Chicago PMI and the final University of Michigan consumer sentiment will be released.  Reactions to this data will likely create more volatility even though many will also be waiting for the June job numbers due out the day after the 4th of July. 

By the way, on Friday after the close, it was reported Facebook (FB) admitted that a bug (which supposedly has been fixed) exposed email addresses and telephone numbers of possibly 6MM users to other people to whom they may have been directly or indirectly connected.  This news along with what we have learned regarding the NSA and its Prism project, make us think that we are nearing an inflection point where benefits of all of this non-private social media (at times forcibly, and many times unknowingly, non-private) no longer outweigh their various costs.  Like it or not, want it or not, many are getting 'linked' to one another only for the benefit of advertisers.  At least LinkedIn (LNKD) services have the potential of providing very good benefits: jobs! 

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